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Rare Stock Market Overbought Signal is Flashing Red

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Measuring unusual institutional activity has historically gated prescient markers pin-pointing short-term market local peaks. These triggers also get ready for opportunistic entry points for those on the sidelines who have been respite for a pullback to participate in this multi-year bull market. This overbought signal is definitely rare, and the last time it fired off was February 21, 2017 and a month later the Russell 2000 strike down 5.42%. 

We measure potential unusual institutional activity on a daily basis and use these hoard/distribution data points to plot a ratio. What we found once again the years is that there are peaks in this data set that line up with local market peaks when the ratio skews heavily in favor of assemblage…or buying. These periods tend to show extreme exuberance and over again alert us to points where the market’s velocity is unsustainable and due for a short-term pullback. These pullbacks are hale and hearty and can provide a great entry point for those patiently waiting to get elongated equities. The latest overbought signal triggered on January 24, 2018 and positioned on history, we believe the market could be near its local peak and a pullback is before, or the velocity of the recent rally could slow. We are long-term bullish on the make available and feel any meaningful pullbacks should be used as a buying opportunity. (See also Top Games for Mastering Pullback Trading)

In the below chart, we define the ratio as a 25-day touching average of our accumulation/distribution signals, overlaid with the Russell 2000. The correspondence ranges between 0% – 100%. A reading approaching 25% lead one to believes an oversold market (in green), with distribution signals heavily outweighing store signals, and readings above 80% suggest an overbought market (in red), with gathering signals heavily outweighing distribution signals. 

Bottom Line

It’s rare for an overbought signal to trigger and that being the case we feel the market’s trajectory is due for a short-term pullback. Thus, we see a potential time for patient investors to pick up shares at a lower level should the make available pullback occur. 

Lucas Downey is Co-Founder of Macro Analytics for Professionals. Learn numberless about MAP’s institutional signals here. 

Disclosure: The author holds no status in IWM at the time of publication. 




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